Special Topics

EMU Still Slowing as Hot Air Keeps Blowingby Robert Brusca September 23, 2011

Foreign and domestic orders among EMU members continue to trend upward by at an ever slower pace.
That is the view from the yr/yr growth rates. Sic month growth rates (memorialized in the two-columns
table shows a sharp slowing in six-month growth from 10.4% at an annual rate to 3.9% at an annual rate.
Three-month growth rates paint the same picture with darker pigments with three-month growth in June at
8.7% but diving to 1.3%, in July, below the rate of inflation over the three-months ended in July. And last
but not least the monthly data show that orders are lower in each of the last two months. Orders have
started to decline outright. But that decline is not yet enough to knock the three month pace into
negative territory but, as noted above, it has dropped three-month growth below the rate of inflation.

Foreign and domestic growth trends each are working their way lower but the three- and six-month
growth rates are not very stable. If we look at the sequential growth rates (12-Mo, to 6-Mo to 3-Mo)
in June the domestic order series shows a sequential decline but in July it no longer has that pattern.
For foreign orders there is no tapering off in growth for the sequential growth rates in June, but by July
the picture of decline is clear. For overall orders it is the recent period for which the declining orders
profile is the most clear cut. Part of the problem is the intrinsic lumpiness of orders and the difficulty in
getting seasonal adjustment done correctly. But the big picture plot of Yr/yr growth rates seems to nail down
the trends of each series pretty clearly. Despite this near term volatility orders growth is headed south.

Meanwhile, the Southern European countries are in a bind. As the G-20 meet three has been little solace
for Europe The rampant market selling over the last few days speaks of a scramble for liquidity that
remains unexplained. We many only know in retrospect what the market scramble was about. With the fate of
Greece hanging in the balance the thing that makes the most sense is that there is some deal to let
Greece default and that word has been closely kept but not closely enough. Enough of the ‘right’ people
know about it that various markets have moved sharply as investors have cut positions ahead of the
growth-deflating event. If this proves to be the case it will be no surprise that commodities backed
off so sharply since a Greek default would cut growth prospects and would put banks on the hook for
losses crimping their ability to operate normally in the months ahead. Even credit agencies got
into the breach as Moody’s downgraded eight Greek banks just ahead of the weekend.

Why now?

We can be clear of one set of facts, however:

(1) Once Greece has its event its problems will not be over if it remains in the Zone.
Greece suffers an extreme price disadvantage since prices in Greece have gone up by 20% more than
prices in Germany since these two countries have been locked together in the same exchange rate regime.
That disadvantage does not go away if Greece remains in the Zone.

(2) If Greek debt is defaulted on there will be severe setbacks for banks in Europe especially in
Greece as well as in France and in Germany.

(3) Bank problems can spread so we have risk of contagion in the aftermath of a Greek default.

(4) Default buys time for Greece but it does not restore its competiveness position. So just as
Greece will at some point come back into the conversation, getting Greece off the hot seat only moves it
down the line and queues up the next worse debtor for market inspection. This means that Spain or Portugal
or Ireland could start grabbing headlines and eventually.

(5) This whole thing does not stop with Greece in fact Greece could be akin to the act of lighting
the fuse on the bomb we all know is sitting there but has just been armed. There may be other hidden risks we
have not yet identified since the Zone itself could wind up at risk.

Based on such reasoning while a Greek default would be a big deal it might only be the harbinger of bigger
deals yet to come. If Greece is to default but remain in the zone all the issues of competiveness between the
Mediterranean countries, the countries of central and northern Europe are back on the table as long run
problems that are hard to solve will persist. The Zone has thus far not mooted a plan to solve the
inter-zonal price discrepancies it has let emerge during the Zone’s early years. As much as EMU tried to
get exchange rates right to start it was careless to that exact same degree in letting its finely chosen
entry parity values for exchange rates become undermined by regional inflation differences.

As the G-20 meets and makes promises it can’t keep, for stability and cooperation, how we can take any
of this at face value? In Europe the Germans have isolated themselves and many others have taken to isolating
Greece. Who is next? In the US Republicans and Democrats could not organize a food fight in the Congressional
lunch room. How are they part of any coordination that might be needed? To make it worse House Republicans have
written a ‘threatening’ letter to Fed Chairman Bernanke, one of the conservative Republicans running for President
has called the Chairman a ‘traitor’. There is no way to believe reassurances out of the G-?? pick your number Seven?
Eight? Twenty? Three? It does not matter. When domestic politics are locked, international politics are
undermined and that says it all.

Meanwhile growth is slipping. The slippage is steady. The cause of the slippage is not being fixed. The
heightened risks have not moved anyone off their ideology to a new consensus. No matter how sure you are
that your ideology is right, it is wrong if you can’t implement it. That brings you up to date. Absent compromise
there is no progress and with ideology compromise is a dirty word and that about sums up where we stand.

Selected Euro-Area Industrial Orders

SAAR Except M/M

Mo/Mo

Jul11

Jun11

Jul11

Jun11

Jul11

Jun11

Euro-Area Detail

Jul11

Jun11

May11

3Mo

3Mo

6Mo

6Mo

12Mo

12Mo

MFG Orders

-2.1%

-1.2%

3.7%

1.3%

8.7%

3.9%

10.4%

8.4%

10.6%

MFG Sales

3.0%

-2.0%

-0.1%

3.3%

-2.5%

6.0%

4.3%

11.2%

6.8%

Consumer

0.4%

-0.5%

-1.1%

-4.8%

5.7%

4.2%

4.0%

3.9%

3.6%

Capital

6.2%

-2.4%

0.9%

19.4%

-1.6%

10.5%

1.0%

14.4%

4.6%

Intermediate

2.2%

-7.5%

7.9%

8.6%

-1.4%

2.5%

-3.6%

9.9%

5.8%

Memo:MFG

Total Orders

-2.1%

-1.2%

3.7%

1.3%

8.7%

3.9%

10.4%

8.4%

10.6%

E-13 Domestic MFG orders

2.2%

-7.5%

7.9%

8.6%

-1.4%

2.5%

-3.6%

9.9%

5.8%

E-13 Foreign MFG orders

-4.5%

2.4%

1.4%

-3.4%

14.1%

0.0%

11.4%

8.5%

12.8%

Countries:

Jul11

Jun11

May11

3Mo

3Mo

6Mo

6Mo

12Mo

12Mo

Germany (MFG):

-3.0%

1.4%

1.9%

1.0%

26.1%

5.8%

19.6%

11.0%

11.9%

France(Ind):

-11.2%

13.7%

2.4%

14.0%

73.2%

3.1%

19.6%

7.9%

24.8%

Italy (Ind):

1.8%

-4.4%

4.0%

5.2%

-24.4%

8.8%

4.2%

10.1%

5.6%

Spain(Ind):

0.9%

-4.4%

2.7%

-3.7%

-13.9%

-6.2%

-0.4%

5.2%

4.6%

Compare: US Factory Ord

2.4%

-0.4%

0.6%

10.8%

-2.8%

10.6%

12.9%

13.9%

13.5%

Some Euro-Area reporters are timely and some lag. This table allows a sequential inspection of trends regardless of topicality